It Is Prudent to Pay Close Attention to Bubbles. The chart above highlights four major U.S. equity bubbles going back to 1929 (the 2008 bubble is included in the 1999 time series) and the Japanese equity bubble of the late 1980's. Each line measures the initial damage done when the bubble bursts, and then tracks how long it subsequently takes an investor to climb back to their “expected” 6% real1 return. It’s typically decades. Even with the amazing returns U.S. stocks have delivered for the past ten years, the S&P 500 Index has still not climbed out of the hole created by the tech bubble of 1999 (the red line, above). Bubbles inflict deep and cruel wounds, and it is right and prudent to avoid them, exploit them, or dance around them as best we can.2
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